The Endgame: Japan Inc. Seeks Salvation Overseas
Monday, February 6, 2012 at 6:56PM Japanese companies spent $70 billion on acquisitions overseas in 2011—a record. Healthcare was the largest sector, $20.6 billion. Armed with a ferociously strong yen, they’re trying to escape the pressures at home. After the Fukushima disaster, one nuclear power plant after another has been taken off line for maintenance. And they stay off line. Now, only four of the 54 are still operating. Fossil fuel plants cannot keep up with demand during peak periods, and electricity rationing—a Third-World phenomenon—has become part of corporate life. Companies also face a stagnant economy and a dwindling working-age population.
And so they seek their fortunes overseas. For example, Sumitomo Mitsui Financial Group and Sumitomo Corp. are acquiring the aircraft leasing business of bailed-out Royal Bank of Scotland for $7.3 billion. But even smaller companies, including many that had not ventured abroad before, are jumping into the fray. For example, Takara Tomy Group acquired US toymaker RC2, and Toyo Seikan bought US based Stolle Machinery.
In addition, Japanese multinationals are expanding their existing production capacity overseas. On the forefront are the automakers. Mired in stagnation, high costs, and energy challenges at home, they’re now shifting production to plants overseas. Most recently, it was Honda and Nissan with investments in China, Mexico, and, yes, the US to produce cars for local and export markets. And one of them is outright exciting. Read.... Manufacturing Supercars in America.
Electronics makers are also struggling in Japan. Last year was particularly rough: the March 11 earthquake and tsunami, Thailand's historic floods that shut down whole segments of the components industry, the strong yen, a hesitating global economy, and shrinking consumer demand at home. And then, in the fourth quarter, TV sales cratered.
Japanese TV makers, known for innovative products and advanced technologies, got clobbered by competitors from Korea and other Asian countries. Sharp Corp. forecast a loss of ¥290 billion for its current fiscal year. Unit sales skidded 38%. It will shift production from TVs to small and midsize LCD panels for smartphones and tablets. Panasonic sang a similar song last Friday when it tried to explain its losses in its TV and semiconductor businesses. It had already announced in October that it would stop production at two of its plants in Japan. Sony, after an eight-year losing spree in its TV business, remains focused on it, incoming CEO Kazuo Hirai announced on Thursday. And he'd miraculously turn it around through unspecified cost cutting measures.
But there are consequences. Shifting investment and production to locations overseas contributed to the first annual trade deficit in more than 30 years—just when Japan can least afford it: national debt will surpass one quadrillion yen by March 2013, the end of the next fiscal year, the Ministry of Finance announced in January. About $14 trillion. A breathtaking 240% of GDP. By comparison, Greece’s debt is a paltry 160% of GDP.
The forecast is based on the budget that the cabinet approved on Christmas Eve when it hoped that no one would pay attention, apparently. After excluding two acknowledged accounting shenanigans, the deficit jumps to a horrid ¥54.4 trillion. The government will have to borrow 56.2% of every yen it spends in 2012, a record even for Japan. But the government has an ingenious solution: a miracle. For more on that vertigo-inducing debacle, read... The Endgame: Japan Makes A Move.
The other solution is a consumption tax hike from the current 5% to 8% by April 2014 and to 10% by October 2015. To make it more palatable, government officials have gone on roadshows. The revenues would be used to stabilize the tottering social security system and reinforce the welfare system, they claimed—rather than for corporate subsidies or for the bailout of TEPCO, owner of the Fukushima nuke. But sales taxes hit low-income workers the hardest. And according to recent polls, 79.5% of the Japanese are opposed to them.
Once it starts, it’s never enough. On Saturday, Prime Minister Yoshihiko Noda said that the consumption tax could be raised even beyond the 10% currently proposed. So the trend is clear.
Meanwhile, life goes on in its own manner. A convoy of 20 supercars was speeding down the Chūgoku Expressway, entered a left-hand bend at 90–100 mph, though the posted speed limit was 50 mph. The highway was wet. And the rest was very expensive.... Superlative Supercar Pileup (incl. video).
Reader Comments (5)
As can be seen by the desperation of Japanese officials, consumption tax is the only one tax that can be increased to really make a different. Some commentators on Japan think that this will make a huge difference and will save Japan or give it some more time. What they miss is that raising the consumption tax will not come free and will have significant implications. That’s why they proposed to start increasing the consumption tax from 5% to 10% by 2015. They can’t raise it now, because it will kill their weak economy. They planned it from 2015, because they think there will be a global recovery by then, which I doubt. Then moved to 2020. There will never be a good time to raise the consumption tax in Japan. In my opinion their action will be too late. I mean, it will pass politically and economically only after the debt crisis start. I refer you to read an IMF report called: “Raising the Consumption Tax in Japan: Why, When, How?” to get an insight about the IMPACT OF A VAT INCREASE ON GROWTH, INFLATION, AND EQUITY. Contrary to the readers, I believe that the consequences of VAT increase will be worse. They write:
“Higher inflation expectations would be a positive development for Japan, which has been trapped by deflation for year”
I agree with the writers that inflation will happen right after the tax hike, as happened before.
I disagree about it's positive impact. Japan need deflation or the private sector won’t find the Japanese bonds attractive. 10 yrs Japanese bonds yield 1% now, but with deflation of 1%, it’s 2% real yield. What happens when inflation is 1%? The real yield is 0%. So by increasing inflation the bond appetite will decrease. With rising commodity prices, there could be additional inflation spike and that could be very negative. No matter what is publicly said, Japan need low deflation, more than inflation.
“Many have expressed concerns about the short-term impact of a VAT increase on the level of activity, but Japan’s own experience does not strongly support such views.”
I disagree again. VAT will decrease GDP because the Japanese economy is very weak. Any growth decrease will affect very negativly the finance of Japan. An increase of VAT will also add to the negative local views of the economy and will hurt the low-income population. I agree with the IMF analysts, that consumption tax is positive long-term, but we must live short-term now, because such an increase could not improve the situation and could expose how bad Japan is. There is another problem. Japan can’t implement the VAT increase fast. They can’t do an increase of 5% this year or next … they can increase by some degree with time so it’s a long-term measure. Again that will not help to improve much the finance of Japan and even if it do, it will be after 2015 as they plan to raise the VAT then.
Government spending is a huge positive for GDP, and if the money is borrowed, there is no negative impact on GDP as government deficits are not figured into it. However, growth through deficit spending borrows from the future, and for Japan, the future is about to arrive.
I’ve lived in Japan and go there frequently. I enjoy the country and love the people. Thanks to deficit spending, the “lost decade” is a myth. The culture is vibrant and constantly moves forward. Tokyo has become a much better, more livable place since 1996, when I went there for the first time. And deflation has been a good thing in a country where everything was enormously overpriced (my first experience in Japan is subject of my book BIG LIKE ... check it out on my website).
The Japanese will work out their problem one way or the other, but it will be at the expense of the younger generation. More taxes, fewer benefits, broken promises, maybe a selective default, less pay, etc. will be an ongoing part of their lives, and they all know it and have accepted it. Hyperinflation could happen, but I doubt it—any kind of inflation will, for the above reasons, make things worse.
BTW, the US is on the same track, but years behind. With the difference that we have about 30% inflation every decade... an insidious form of government tax and Fed-engineered theft.
to net spenders.
how long can a country inflate away its currency and not reinvest in its own capital projects while its infrastructure is falling apart.
the answer? long enough for kyle bass to go broke.